China’s margin financing balance has climbed close to its 2015 peak while short selling has been sharply reduced by tighter rules, according to UBS.
It is scheme that lets investors borrow money or shares to trade stocks. Launched in 2010 now, it covers more than two-thirds of listed companies and accounts for about 2% of market capitalisation and 10% of daily trading.
As of August, the margin financing balance exceeded 2 trillion yuan, about $276 billion which is near the level reached before the 2015 market crash.
Short selling has been restricted by regulatory measures, including a 2024 suspension of securities borrowing and lending.
Balances fell to 7.7 billion yuan, down from a peak of 147 billion yuan in 2021 and representing just 0.01% of market capitalisation. Short positions can still be built from broker inventories, but activity remains limited.
UBS said margin financing flows have become a proxy for shifts in investor sentiment like when balances rise by more than 5% in a week, the market often shifts into “risk-on” mode, shifting to small-cap and volatile stocks.
Retail investors make up the majority of accounts, more than 7.5 million though hedge funds and wealthy individuals use leverage more actively. Turnover is high, with annualised trading reaching 14 times on the long side and 53 times on the short.
UBS found short-selling data to be consistently informative for stock picking, while margin financing flows alone were less reliable due to the mix of retail and institutional activity.
Combining margin financing with other positioning measures such as mutual fund and offshore flows improved performance, generating a 15% annualised return since 2017 in UBS’s model.
The scheme has become an important part of China’s equity market infrastructure, though its development has been shaped by periodic regulatory tightening to limit speculative trading.
Source :
https://www.investing.com/news/stock-market-news/how-chinas-leverage-and-shortselling-scheme-drives-market-despite-tighter-curbs-4211618
